Sleeping fewer hours than recommended puts young adults at increased risk that any mental health problems they already have will become persistent.
It could even trigger mental problems for the first time in extreme cases.
The research, involving 20,000 Australians aged 17 to 24, found sleeping less than the recommended seven to eight hours per night could worsen and entrench pre-existing mental issues.
People without a history of mental problems were at increased risk of developing mental problems if they slept fewer than five hours per night.
The study, conducted by experts from Sydney's George Institute for Global Health and published today in the journal Sleep, provides some of the strongest evidence yet that insufficient sleep can worsen or even cause mental problems.
Evidence on the link until now has been largely based on small groups or case histories.